Key Differences Between Offers in Compromise and Currently Not Collectible Status

Quick comparison

• Offer in Compromise (OIC): A negotiated settlement that resolves a tax liability for less than the full amount when the IRS determines the offer reasonably reflects the taxpayer’s ability to pay (IRS OIC program).
• Currently Not Collectible (CNC): An administrative classification that suspends collection activity because the taxpayer lacks disposable income; the underlying tax debt remains and may be revisited (IRS CNC guidance).

Sources: IRS, Offer in Compromise; IRS, Currently Not Collectible Status; IRS Publication 594 (Collection Process).

How each option works in practice

Offer in Compromise (OIC)

An OIC is a formal proposal to the IRS to accept less than the full tax liability. Taxpayers use Form 656 (or Form 656-L for doubt as to liability) plus a detailed financial statement (Form 433-A, 433-B or equivalent) and an application fee, unless exempt. The IRS evaluates whether the offer reflects the taxpayer’s ability to pay, considering:

• Reasonable equity in assets (home, vehicles, investments)
• Future income and allowable living expenses
• Collection potential over the statute of limitations period

If the IRS accepts an OIC, the taxpayer must comply fully with filing and payment requirements for five years after the offer is accepted, or the offer can be defaulted. Interest and penalties stop applying to the portion of the liability that is forgiven, but the forgiven amount may be taxable income in some cases (consult a tax advisor). (IRS, Offer in Compromise).

Currently Not Collectible (CNC)

CNC is not a settlement: it is an administrative hold. The IRS places an account in CNC when verified necessary living expenses exceed monthly income and leave no realistic ability to pay. During CNC status the IRS generally:

• Stops most collection actions such as levies and garnishments, though liens may remain in place
• May still file Notices of Federal Tax Lien or continue the lien’s existence
• Can apply future federal or state tax refunds to the debt in some situations
• Periodically review the taxpayer’s financial situation and can remove CNC status if circumstances improve

CNC halts aggressive collection but does not eliminate interest and penalties or the debt itself. (IRS, Currently Not Collectible Status; IRS Publication 594).

Eligibility: who qualifies

Offers in Compromise

• Taxpayers who can prove that they cannot pay the full amount or that doing so would create extreme hardship
• Cases include doubt as to collectibility (insufficient assets/income), doubt as to liability, or effective tax administration situations
• Requires detailed financial disclosure; qualifying does not guarantee acceptance (IRS pre-qualifier tool can help but is not final)

Currently Not Collectible

• Taxpayers with no meaningful disposable income after necessary expenses
• Examples: long-term unemployment, fixed low income with essential expenses, serious medical situations
• CNC is often used when a taxpayer expects inability to pay to continue for a meaningful period, but it’s reversible if income rises

In my practice working with taxpayers for 15+ years, I’ve seen CNC applied to stabilized low-income situations where an OIC would not be realistic because the IRS can reasonably expect future recovery is unlikely — but each case is unique.

Pros and cons: practical trade-offs

Offer in Compromise (OIC)

Pros:

• Can permanently reduce the total tax obligation if accepted
• May stop interest/penalties on forgiven balance
• Clears the account when terms are met, improving financial reset

Cons:

• Requires detailed documentation and negotiation; acceptance rates are limited
• Application fee and down payment may be required
• Filing a rejected OIC results in loss of fees and delay in other collection alternatives
• IRS can take months to decide

Currently Not Collectible (CNC)

Pros:

• Immediate relief from levies and aggressive collection actions in most cases
• Low administrative burden to request CNC compared with preparing an OIC
• Useful short- to medium-term breathing room while dealing with acute hardship

Cons:

• Tax debt remains; interest and penalties may continue to accrue
• Liens often remain, affecting credit and property transactions
• Periodic IRS reviews can restore collection activities if your finances improve

Application steps and documentation

Offer in Compromise (OIC) – typical steps

1. Run the IRS Offer in Compromise pre-qualifier or consult a tax professional. (See IRS OIC page.)
2. Complete and submit Form 656 (or Form 656-L when applicable), the required financial statement (Form 433 series), and the application fee (waiver rules may apply).
3. Include a realistic offer amount and payment option (lump sum or installment).
4. Respond promptly to IRS requests for additional documentation and wait for the decision. Appeals are available if rejected.

Currently Not Collectible (CNC) – typical steps

1. Contact the IRS Collection Office handling your account or respond to the IRS notice and state your hardship facts.
2. Provide evidence of income and monthly necessary living expenses (pay stubs, bank statements, bills).
3. The IRS will analyze your ability to pay and either place your account in CNC or propose alternative collection methods (e.g., installment agreement).
4. Keep records and notify the IRS of material changes; expect periodic reviews.

Note: In practice, taxpayers sometimes seek CNC first to stop immediate collection and then prepare a stronger OIC application after stabilizing their documentation.

Common mistakes and how to avoid them

• Treating CNC as debt forgiveness: CNC only delays collection. Continue tracking deadlines and filing requirements.
• Submitting a weak OIC: Offers that ignore collectible equity or use soft estimates are often rejected. Base offers on documented assets and realistic living expenses.
• Ignoring lien and refund risks: Liens can remain in CNC and may block property sales; tax refunds may be applied to the debt.
• Missing compliance after an accepted OIC: The IRS requires you to remain current on taxes and payments for a period after acceptance—failure can void the agreement.

Real-world examples (anonymized)

Example A — OIC success: A self-employed contractor experienced a sharp, sustained drop in revenue and had limited equity in a home and few liquid assets. With complete income statements and verified expenses, we proposed an OIC slightly above the IRS’s calculated reasonable collection potential. The IRS accepted, and the taxpayer paid the negotiated lump sum over a short installment schedule. The account was closed after terms were met.

Example B — CNC relief: A retired individual with fixed Social Security income and high medical costs provided a month-by-month expense schedule showing no disposable income. The IRS classified the account as CNC, stopped bank levies, and agreed to periodic reviews. The debt remains but immediate collection ceased.

Interaction with other remedies and long-term effects

• Installment agreements are an alternative when you can pay something monthly; compare them to OICs and CNC. For more on choosing between installment plans and OICs, see our guide: “Installment Agreements vs. Offers in Compromise: Which is Right for You?” (finhelp.io link).
• If you’re considering reapplying or modifying an existing OIC, our content on “How to Reapply or Modify an Existing Offer in Compromise” walks through steps when circumstances change.

Helpful internal links:

• Offer in Compromise (OIC) overview: https://finhelp.io/glossary/offer-in-compromise-oic/
• Currently Not Collectible (CNC) details: https://finhelp.io/glossary/currently-not-collectible-cnc/
• Installment vs OIC comparison: https://finhelp.io/glossary/installment-agreements-vs-offers-in-compromise-which-is-right-for-you/

Frequently asked questions

Q: Can I apply for both OIC and CNC?
A: You can ask for CNC when collection is impractical and later apply for an OIC if your long-term inability to pay appears permanent. However, CNC does not guarantee OIC eligibility; the IRS will evaluate each request on its own terms.

Q: Does CNC remove tax liens or stop tax accruals?
A: No. CNC typically does not remove liens and does not erase the tax liability. Interest and penalties may continue. Liens often remain until the debt is paid or otherwise resolved.

Q: How long does an OIC take and what are chances of acceptance?
A: OIC processing times vary by case complexity; expect months in many cases. Acceptance depends on the strength of documentation and whether the offer matches the IRS’s assessment of collectibility.

Professional tips

• Gather detailed, verifiable documentation before applying for either relief. The IRS emphasizes verifiable financial data.
• Consider CNC as emergency relief to stop levies while preparing an OIC or other solution.
• If accepted for OIC, keep tax filings and payments current for the required compliance period; otherwise the OIC can be defaulted.
• Work with a qualified tax practitioner where possible—especially when dealing with complex assets or business accounts—because a small documentation gap can affect outcomes.

Final takeaways

Offers in Compromise and Currently Not Collectible status solve different problems: OIC can permanently reduce a tax debt when collection is unrealistic, while CNC temporarily pauses collection when the taxpayer lacks disposable income. Both require accurate records and follow-through; choosing between them depends on your short-term cash flow and long-term prospects for payment.

Professional disclaimer: This article is educational and does not replace personalized advice. For specific cases, consult a qualified tax professional or attorney. I have over 15 years of experience helping individuals navigate IRS collections and used anonymized client examples here to illustrate differences.

Authoritative sources

• IRS, Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise
• IRS, Currently Not Collectible Status: https://www.irs.gov/newsroom/currently-not-collectible-status
• IRS Publication 594, The IRS Collection Process: https://www.irs.gov/publications/p594